ECB warns against steep wage increases

Frankfurt, January 29:

Bundesbank president Axel Weber warned in an interview that excessive wage demands could lead to further interest rates increases by the European Central Bank (ECB).

“If the upcoming wage rounds are too high and jeopardise price stability, further rate hikes might be needed,” Weber, who as head of the German central bank sits on the ECB’s rate-setting governing council, told the daily Die Welt on the sidelines of the World Economic Forum (WEF) in Davos.

The ECB has raised eurozone borrowing costs six times since December 2005, last lifting its benchmark ‘refi’ refinancing rate to a five-year high of 3.50 per cent. Further rate increases are believed to be on the cards in coming months.

Weber said high wage agreements pushed up producer prices and could therefore trigger a so-called inflation spiral. In the German engineering and metalworking sector, some labour representatives have called for wage increases of up to 10 per cent in view of the current economic boom and plentiful profits in the sector. The metal-sector wage talks act as a yardstick for other areas of the German economy. And Germany, as the eurozone’s biggest economy, similarly acts a yardstick for the rest of Europe.

“Wage developments are fairly heterogenous in the eurozone,” Weber said. “In the past, wage levels have risen disportionately strongly in many countries, while in Germany they were significantly below the average for the single currency area as a whole.”

That not only boosted German competitiveness, but also helped reduce price pressures in Europe.

“If wage policy in Germany now moves in the other direction, that could have a noticeable effect on inflation rates across the entire eurozone,” Weber argued.